Real estate benefits could be cut as part of tax reform measures

WASHINGTON — Since Congress has taken off on its annual summer recess, you might assume that nothing is happening on Capitol Hill that could affect the taxes you pay on your home. Quite the reverse.

Staff members of the House and Senate tax-writing committees are busy putting together legislative drafts that may determine the fate of real estate's most prized tax benefits — first and second home-mortgage interest deductions, property tax write-offs, capital gains exclusions and others.

Both committees' chairmen have promised major tax reform proposals this fall. They've been evaluating deductions, credits and loopholes in terms of revenue costs and economic benefits, including the $70-billion-plus yearly expense of the mortgage interest write-off. The process that's underway represents the most serious effort to simplify and reorganize federal tax law since the Tax Reform Act of 1986.

On the Senate side, Finance Committee Chairman Max Baucus (D-Mont.) asked colleagues in both parties to submit recommendations on which tax preferences should be preserved, starting from a "blank slate" where all current benefits are eliminated. To provide senators political cover and deniability, the committee put all recommendations under a 50-year top-secret classification, and restricted access to them to just 10 staff members.

On the House side, Ways and Means Committee Chairman Dave Camp (R-Mich.) instructed staff to move ahead with drafts during the recess, allowing the committee to consider a final tax reform bill in October. That would tee up the legislation for a possible full House floor vote.

So what's really on the chopping block? Is there a possibility that as part of a comprehensive tax reform bill, preferences for homeownership could be reduced or phased out?

Here's a quick overview: The House bill under construction seeks to reduce individual and corporate marginal tax rates across the board. Camp has said he wants to clear out deductions, exclusions and other longtime tax code subsidies enough to lower individual taxes to a top marginal rate of 25%, down from the current 39.6%. He also wants to eliminate the alternative minimum tax and slash corporate tax rates.

The problem, though, is that lowering tax rates to these levels would cost trillions of dollars in lost revenue over the coming decade and would only be partially paid for by eliminating or cutting the vast majority of current tax preferences, including for homeowners. Lowering the top marginal rate for individuals to 28% — instead of the proposed 25% — would help, some analysts say, but still might not close the lost-revenue gap.

Another complication: Major tax benefits that have been in existence for decades, such as the mortgage interest and property tax deductions, are so welded into the system that eliminating them, or sharply reducing them, would send shock waves throughout the national economy.

The Tax Foundation, a Washington think tank that describes itself as nonpartisan, released a study at the end of July projecting that an elimination of the mortgage interest write-off would cut the gross domestic product by $254 billion based on incomes in 2012, and would result in the loss of 659,000 jobs. In a separate study, the Tax Foundation projected that elimination of homeowner property tax deductions would lower GDP by $94 billion and trigger the loss of 216,000 jobs.

Findings such as these lead housing proponents to believe that neither the House nor the Senate bill can afford to make drastic reductions to long-standing homeowner tax benefits. Jerry Howard, chief executive of the National Assn. of Home Builders, said in an interview that the Tax Foundation's study "helps drive home the points we've been making [on Capitol Hill] about the value and importance of housing incentives" to the entire economy.

Other industry analysts aren't so sure. Not only did the Ways and Means Committee hear a panel of prominent economists slam the housing write-offs as inefficient and heavily tilted to benefit higher-income taxpayers, they note, but Camp's own make-or-break income tax cut targets could take precedence over retaining current deductions. On top of that, Democrats in the Senate want to raise revenue through tax reform, not cut it.

If that's the case, something's got to give. And that might require lower write-offs for housing — unpalatable politically as they may be a year before congressional elections. Whether tax reform legislation that does that could pass either house, however — in a year where Republicans and Democrats can't even pass a budget to fund the government — is much in doubt.